Regional Economic Development in Theory and Practice

10973-01_PT1-CH01_REV.qxd 2/6/08 3:41 PM Page 3 1 Regional Economic Development in Theory and Practice Richard M. McGahey lthough the American economy has entered the sixth year of the current Aexpansion, job growth during the current recovery is significantly slower than in the past. On a peak-to-peak basis, most indicators for the current recovery lag behind the postwar average—GDP growth is 2.6 percent, compared to a postwar average 3.3 percent gain; wages and salaries are 1.2 percent higher, compared to a postwar average of 2.8 percent; and employment is up only 0.6 percent, compared to a postwar average of 1.7 percent.1 And there is a marked slowdown since 2003. Between 2003 and the first half of 2007, real median hourly wages have actually declined by 1.1 percent, and even for the top 20 percent of wage earners, hourly wages have risen by only 0.5 percent. Incomes also are growing significantly slower than productivity during this recovery. Since 2000, overall productivity is up by 19.8 percent, while real weekly earnings rose by 3.5 percent for women and actually declined by one percentage point for men.2 So although the American economy continues to grow, it is producing jobs at a slower rate than in typical recoveries, and many of those jobs are actually paying declining real wages. Richard McGahey is a program officer at the Ford Foundation. The views expressed in this chapter are his. 3 10973-01_PT1-CH01_REV.qxd 2/6/08 3:41 PM Page 4 4 richard m. mcgahey Not surprisingly, economic problems are disproportionately concentrated in older metropolitan regions, especially those where traditional manufacturing and related sectors continue a long-term structural decline. In 2006, on an annual basis, of the forty-nine largest cities in the United States, unemployment was the worst in Detroit, but also very high in Milwaukee (forty-seventh), Oakland (forty- sixth), St. Louis (forty-fifth), Baltimore (forty-third), and Philadelphia (fortieth).3 Although many cities are showing signs of life in terms of growing downtown real estate markets and other indicators, they continue to show overall higher levels of economic distress than the nation, distress that also affects their surrounding regional economies. According to a variety of analyses, the problems facing low-income workers and regions are essentially determined by larger national or global economic forces. The increase in globalization has meant that jobs, especially lower-skilled jobs, can be more easily moved out of the country. A corollary argument is that higher- skilled jobs are those most likely to stay in the United States, placing an ever- higher premium on skills and education, which disadvantages lower-skilled workers. Declining unionization and continuing racial and gender discrimination and exclusion also contribute to the problem. And increasing numbers of poor, lower-skilled immigrant workers have been entering the United States, leading some analysts to argue that this creates increased competition with native-born lower-skilled workers. This claim is disputed by others, who assert that immigration has no major impacts.4 Of course, national policy factors such as trade, immigration, federal taxation and regulation, and macroeconomic policy are beyond the control of any one region. But in contrast to these broad macroeconomic analyses of the causes of lagging economic performance, there is a renewed interest in what cities, regions, and states can do to improve their economies. For a multitude of other policy factors are under greater state and local control. Zoning, land use, and nonfederal fis- cal and taxation policy are relatively free of federal direction. Education and workforce development policies and finance, along with some labor regulation, are largely state and local responsibilities. Environmental laws and regulations vary considerably among jurisdictions, both in formal law and in actual application and enforcement. Many states and localities provide or support financial, tech- nological, and technical assistance to businesses. State and local procurement is locally controlled, and transportation policy is largely directed by states and localities, although supported through federal taxes. This chapter reviews regional efforts in economic development, with special attention to the problems facing older industrial cities and regions. Paradoxically, in 10973-01_PT1-CH01_REV.qxd 2/6/08 3:41 PM Page 5 regional economic development in theory and practice 5 a time where the impact of global economic forces is increasing, strategies to increase prosperity and economic growth increasingly are focused at the regional level. Economic Development Subsidies and Their Critics In the twentieth century, regional economic development policy in the United States became focused on using tax and other incentives and subsidies to encour- age companies to relocate to other states. During the Depression, Mississippi pio- neered the use of Industrial Development Bonds (IDBs) to finance facilities for companies moving from the North.5 IDBs and other policy inducements spread, with cities also offering a variety of location incentives to firms. The practice of attracting firms across state lines, often with a variety of financial inducements, is known derisively as “smokestack chasing” or, more recently—as relocation efforts expanded beyond industrial firms—as “buffalo hunting.” The use of incentives to induce business relocation became very widespread, and there now is a somewhat dizzying range of incentives offered to firms. Peter Fisher identifies three broad classes of incentives—discretionary, entitlement, and tax cuts—and the picture is further complicated by programs that focus on specific industries (manufacturing, high technology), specific locations (economically distressed regions, urban “blight” areas, rural communities), differing uses of funds (plant and equipment, firm-specific job training, research and development, infrastructure), in-state versus out-of-state firms (“retention” versus “attraction”), different sections of the tax code (corporate income, property, payroll), and different public agencies (cities, states, quasi-public development corporations, special- purpose tax districts, public authorities). In part because of this wide-ranging array of options, many of them not subject to public disclosure or scrutiny, it is diffi- cult to know how much is being spent, and with what impact. Two independent estimates valued state and local incentive spending at approximately $50 billion nationally in 1996, although both studies cautioned that the estimate was very likely too low, given imprecise valuation and the lack of transparency, and a diverse range of incentives.6 Incentive-based approaches to economic development have long been under fire on a number of fronts. One line of criticism is rooted in mainstream economic theory and the distinction between public and private goods. In this view, gov- ernments should compete for business on the basis of their general economic and policy climate, including factors such as overall tax rates, regulation, and educa- tional quality, but should not use taxes and spending to compete for individual businesses. The use of scarce public revenue to induce changes in location by 10973-01_PT1-CH01_REV.qxd 2/6/08 3:41 PM Page 6 6 richard m. mcgahey private firms means that less money is available to spend on appropriate public goods, and private firms receive a windfall for economic activity that they likely would have carried out anyway.7 A second critique of subsidies was developed by the Corporation for Enterprise Development (CfED), a nonprofit that advocates policies that look at the full range of factors supporting a healthy economy—not just tax rates and regulation, but education and workforce skills, environmental quality, and infrastructure. CfED’s principal means of communicating this approach has been the “Devel- opment Report Card for the States,” first issued in 1987, which created broad indexes of activities and outcomes deemed vital to economic growth and shared prosperity. When first issued, the report card was positioned against conventional cost indexes of economic development or “business climate,” especially the one issued by a consulting firm, Grant Thornton, which primarily measured costs and taxes for manufacturing firms and ranked locations accordingly—lower costs and taxes were largely equivalent to a high ranking. Indexes like Grant Thornton’s viewed all public expenditures as costs facing individual firms, even if those costs were taxes and public spending to support infrastructure and education, two factors that are essential to economic growth. Further, higher wage costs in these indexes were viewed as a negative from the firm’s point of view, but these costs can also be viewed as an indicator of greater prosperity, and therefore as an indicator of economic success.8 In contrast, CfED’s approach looked at broad factors associated with outcomes such as high per capita income, job creation, business expansion, small business start-ups, education, research and development, and infrastructure. The various subcomponents of the analysis have changed somewhat during the past twenty years, but the overall logic remains the same. The report card now focuses on three broad domains, composed of sixty-seven specific measures: performance (including economic, quality of life, and environmental data); business vitality (including business start-ups and closings, and industrial diversity); and development

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